Sen. Mark Warner on Need for Probe Into What Caused Thursday's Plunge

This is a rush transcript from "Your World With Neil Cavuto," May 7, 2010. This copy may not be in its final form and may be updated.

NEIL CAVUTO, ANCHOR: Well, first the plunge and now the probe. Senate Democrats demanding an immediate investigation into what caused the Dow’s 1,000-point dive for a while yesterday. My next guest leading that charge, Democratic Senator Mark Warner joining me.

Senator, where does this stand right now? What do you want to look into specifically?

SEN. MARK WARNER D-VA.: Neil, all we want to try to do is get what — some of the facts. I think we’ve seen a dramatic upsurge in high- frequency trading over the last couple of years. We’ve seen this co- location around trading exchanges. We see 3,000 trades every second.

You know, I just want to find out what’s going on because I know I got flooded with e-mails yesterday from some small traders, small brokers who were saying, hey, is everything on the — is everything fixed in the big market at this point?

I don’t think there’s as much an investigation as trying to say to SEC, CFTC, hey, maybe a few less lawyers and a few more technology quants trying to figure out what is really going on in this high-frequency trading...

(CROSSTALK)

CAVUTO: Well, you know, that’s — Senator, that’s not a bad idea to get people technically trained in this stuff to be able to judge it and police it. That’s not a bad idea.

Could I ask you this, though? We’re hearing reports that the so-called "fat finger" culprit, someone who might have, you know, hit the wrong key, a B for an M or whatever, that didn’t happen. I don’t know how they were able to rule that out. Do you know or have you heard anything else?

We’re getting some reports that Citigroup, the big bank, was among those saying it wasn’t us, it wasn’t us, it wasn’t us. Any closer to finding out who it might have been or what entity might it have been?

WARNER: Neil, I mean, we’ve all heard — I’ve heard some of the same rumors, but something is a little wacky when Accenture goes from about $40 a share down to a penny back up to $40, when Procter & Gamble drops 20 points virtually in a minute or two.

Something was wrong, whether it was a technology glitch, whether it was part of high-frequency trading, all I’m saying is we don’t need to create some new level of bureaucracy, we just need a little more transparency here.

You know, a few years back when people created, you know, CDS and a whole series of these new swaps that were supposed to take risk out of the market and all of a sudden we have a lot of mortgages ranked AAA that supposedly were risk-free, we found that wasn’t the case.

We may see now with this high-frequency trading what may be the first shot across the bow of what could be the next range of systemic risk. And we ought to get ahead of this one at least in terms of information and transparency.

CAVUTO: But normally, and as what happened in the melt-down in 2008, I remember that quite well, sir, and I was covering it sort of hour by hour, you — you get in what they call fast market conditions. And everyone said some sort of sinister being, some evil entity is profiting off of this.

But the reality is, everyone is just getting out en masse and trying to squeeze through the door, because one sell triggers another sell. a key Dow component falls, another one in this case, after P&G, 3M, and then Accenture, and then it’s a spill-over, a domino effect.

And nuk-nuk-nuk, they all go, and then it hits the next sector and the next sector. And then with these sophisticated computers today, at a pace and in a volume unprecedented. Is the answer then to redo the computer systems or to cut down on the computers, or to live with it because these are the times in which we live?

WARNER: Neil, it’s a great question. I don’t know the answer. I sure as heck would like to get a little more information first, maybe take a deep breath here. I do know earlier in the year there was a lot of rumblings from a little while about something called "flash trading...”

CAVUTO: Right.

WARNER: ...where it looks like some of these large firms that could get a fraction of a second’s head start above everybody else, they were kind of gaming the system. We never found out how many tens of billions of dollars might have been made. You know, if you’re a small time town broker...

(CROSSTALK)

CAVUTO: But we do know in the end — we do know when that was finally crunched, it turns out everybody lost money. So...

(CROSSTALK)

CAVUTO: Now someone — you’re right, someone might have lost a little less because they got out the door first. But I guess my point is then, is it just reining in on the technology? Because that gets to be a very sticky wicket, right?

WARNER: No — yes, listen, Neil, I spent 20 years in the technology business before I got into politics. I’m not going to trash technology. But sometimes what we’re seeing here is speed for the sake of speed and the micro-second is — you know, trades happening in a micro-second means there’s no ability to have any kind of human check on this.

And there has got to be some ability where we can get transparency, speed, and also some system where you don’t have — how do you explain to somebody who might have panicked in those 16 minutes yesterday, who might have lost, you know, their savings because they panicked because — not because of the market changing, because something happened in the technology?

CAVUTO: But it all came back, right?

WARNER: It all came back unless you were — I understand that some of the trades are going to actually be recouped, but if you were in that gap of that 16 or 20-odd minutes, you might not be feeling the same way.

CAVUTO: But they’re supposed to make that back to investors, those who fell 16 percent.

WARNER: That’s what I’m hoping. But let’s see how we can prevent it from happening again.

CAVUTO: OK. Senator, thank you very much.

WARNER: Thanks, Neil.

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